This copy is for your personal non-commercial use only. To order presentation-ready copies of Toronto Star content for distribution to colleagues, clients or customers, or inquire about permissions/licensing, please go to: www.TorontoStarReprints.com

The giant holes in the Tim Hortons deal: Olive

The imminent loss of independence at Tim Hortons Inc. — yet another blow to Canadian economic sovereignty — reminds us of how Big Business routinely conducts itself in ways contrary not only to the public interest but its own.

The problems with this deal are far worse than tax avoidance. The proposed $12.5-billion (U.S.) merger of Tim Hortons and Burger King International Inc. is not a validation of Stephen Harper’s policy of deep-discount corporate tax rates, a false assertion the PM’s minions rushed to make after the Aug. 24 announcement that a combined Tim Hortons and Burger King will incorporate in Canada in a so-called “tax inversion” to dodge America’s high corporate tax rates. Last year, both chains paid about 27 per cent of their profits in taxes.

The actual M.O. of 3G Capital, chief entity of the Brazilian investor group acquiring Tim Hortons, is to buy scads of companies, building revenues by simply buying other people’s successes stories. The 3G windfall machine then reaps profit by rapidly cutting as many jobs and other expenses as possible at its acquired companies, in contrast to the Tim Hortons model of constant reinvestment in a business built to last.

There is a role for 3G’s quick-buck approach, in the case of hopelessly distressed firms that can be profitably lowered into the grave.

But taken to excess, as it has been over the past generation, the widespread practices of vulture investing and creation of near-monopolies by acquiring every major business in an industry have undermined capitalism.

They help account for an unhealthy 21st century capitalism that is undermined by short-sighted emphasis on immediate gain; stifling of cost-intensive innovation; reduction in consumer choice; and destruction of household incomes, with depressed consumer spending and stagnant GDP growth the result.

There’s no “net benefit” to Canada. A merger of Tim Hortons and Burger King would not be of “net benefit” to Canada. Which means that, according to federal law, the proposed combination is illegal and should be blocked.

There is ample recent precedent for that, the Harper government having blocked no fewer than three high-profile attempted foreign takeovers since taking office.

Burger King’s skimpy description of this deal’s supposed benefits to Canada consists of a pledge to maintain the status quo, when my understanding of the law is that there is to be at least a slight increase in benefits to this country.

In any event, such promises are as believable as the pitches made by vendors of Florida swampland. Ottawa learned this the hard way when U.S. Steel Corp. soon shuttered the venerable Hilton Works, an economic mainstay of Hamilton, not long after buying Stelco Inc., and again when Illinois-based Caterpillar Inc. relocated the London, Ont., locomotive works it had just acquired to lower-wage jurisdictions in the U.S. and Mexico, throwing 470 Canadians out of work.

The folks promoting this deal are also job killers. Jorge Paulo Lemann, the São Paulo tycoon who is first among equals at 3G Capital, has said in a candid moment that his singular business principle is to relentlessly cut costs, just as one must constantly trim one’s fingernails. Think of a nail clipper as the business philosophy of Tim Hortons’ new owner, if this deal goes through.

Lemann, with an estimated personal net worth of more than $24 billion (U.S.), is an unapologetic job killer, since that is the most expeditious means of cutting a huge amount of costs.

Four years ago, 3G’s Anheuser-Busch InBev, the world’s biggest brewer, abruptly killed 8,000 jobs across Europe — more than 10 per cent of the workforce — triggering brewery blockades by aggrieved workers. 3G had already cut more than 2,000 jobs at St. Louis-based Anheuser-Busch Cos., maker of Budweiser, before the ink had dried on that acquisition.

3G Capital killed all 740 jobs at H.J. Heinz Co.’s Leamington, Ont., operation soon after acquiring that Pittsburgh-based firm, depriving the longtime “Tomato Capital of Canada” of its chief source of household income and decimating the municipal tax base.

And upon acquiring Burger King, not only were most head office jobs wiped out, but 3G reaped a windfall by selling the chain’s company-owned stores to franchisees.

By comparison, smart operators like McDonald’s Corp. and Tim Hortons retain a sizeable number of corporate stores, which are labs for innovation in best practices, from whose success franchisees can learn and profit.

Canada is one of the few markets in which McDonald’s has been eclipsed in size by an incumbent, Tim Hortons. Burger King, by contrast, has failed in its 61 years of revolving-door ownership to master even the basics of fast-food success, particularly in its traditionally abysmal franchisee relations.

Under 3G control since 2010, a Burger King in supposed turnaround mode saw its sales actually slip 0.5 per cent in 2013. That’s not a surprise, given the complaint by the company’s independent franchisees that BKI under-spent on advertising support.

In keeping with 3G’s slash-and-burn approach, Burger King will try to boost Tim Hortons’ profit margin from its current, respectable 25 per cent to the 50 per cent boasted by Dunkin Brands Group Inc. Dunkin’s cost-paring approach has yielded Dunkin investors an average annual return on their investment of just 5.1 per cent over the past decade. The comparable number for Tim Hortons is 16.1 per cent.

There’s a sense of déjà vu. Tim Hortons once before surrendered its independence to a struggling U.S. burger chain. Its unhappy relationship with Ohio-based Wendy’s International Inc. ended in 2006. As Tim Hortons co-founder Ron Joyce noted in his memoir, Always Fresh, “Wendy’s simply did not perform, leaving Tim Hortons as (Wendy’s) only means of growth.”

It takes a fair amount of pixie-dust belief to imagine that yoking the company’s fortunes to yet another poorly managed also-ran U.S. burger chain is somehow going to improve the admittedly subpar performance of Tim Hortons’ 866 U.S. outlets — Tim’s stated rationale for this deal.

At least for now, Burger King insists it won’t try to ram Timbits down the throat of its all-independent franchisee network, which might balk at any attempt to do so. But that only raises the obvious unanswered question: By what means, exactly, will Burger King, a chronic underperformer in its core U.S. market, help Tim Hortons thrive there?

The combined company is to be headed by the 34-year-old CEO of Burger King, whose background is in financial engineering, not fast food. That inexperience shows in the faltering progress of Burger King’s turnaround.

With its more ambitious menu than the burger chain, Tim Hortons requires above-average skill, both in leaders with supply-chain management expertise and among carefully recruited and trained minimum-wage store employees.

With apologies to Evelyn Waugh writing on another topic, contemplating a Tim Hortons under 3G Capital’s control is to anticipate the horror of watching a monkey juggling a Sèvres vase.

More from the Toronto Star & Partners

LOADING

Copyright owned or licensed by Toronto Star Newspapers Limited. All rights reserved. Republication or distribution of this content is expressly prohibited without the prior written consent of Toronto Star Newspapers Limited and/or its licensors. To order copies of Toronto Star articles, please go to: www.TorontoStarReprints.com